ABOUT TDM
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ADR - a useful tool in legal risk management
Any lawyer working with a client, be it in private practice or in-house, will probably have felt totally confident advising on his (or her) area of expertise, and at the same time have a vague feeling of uneasiness that something is 'out there' that is not being covered. That something could be in the context of a one-off transaction, a continuing activity (for example, a construction project or a project for the development of a new product) or general day-to-day activity. Everyone in the team (lawyers and other specialists alike) will have given their best advice and made their best efforts to make the thing they are working on happen. But there might still remain a vague feeling that there is something lurking, like an unseen predator at the edge of the woods - difficult to identify but surely one day it will strike. The lawyer responsible for continuing management of the contract documentation might feel better if he (or she) gives this thing a name and calls it 'legal risk'. He might feel even better if he decides that he ought to have in place a legal risk management programme.
But of course, one of the key elements in the process of risk management of any sort is identifying the risk in the first place. So what is it that gives a lawyer the sense of unease? How do you identify the risk, define it, assess it, and then manage it, reduce or eliminate it? How do you get others to understand what you are talking about and take the risk seriously?
A clearer idea of what is meant by 'legal risk'
We are not talking here about the kinds of issues that are easy to put into a checklist (such as a due diligence checklist for a company acquisition), or into a compliance programme in well-developed areas such as competition law or banking. The 'legal risk' discussed in this article is the type that cannot be traced back to a clear failure to comply with a statutory provision or a code, or a breach of a clause in a contract. In those cases, the consequence of non-compliance or breach is usually capable of quantification. This article aims to discuss the kinds of conduct, at individual or corporate level, that lead to an unspecified 'erosion in value'.
Value in a company can be eroded, for example, in any of the following ways (and the list is not exhaustive):
- Loss of customer confidence
- Loss of investor confidence
- Loss of employee motivation (leading to loss of productivity)
- Negative public opinion - with a consequent impact on the company's share price
- Poor management of business relations (anything from inefficient credit control, to breakdown in Communications on long-term projects, to loss of business altogether)
- Poor management of disputes (both at the pre-litigation stage and during litigation).
We all recognise that there is value in these issues - it can't necessarily be quantified but we know that we ought to do something to preserve it. This is, of course, where the culture of a company becomes important. A compliance culture facilitates a virtuous circle: a positive communication programme generates an awareness of these 'soft' areas of risk, which changes attitudes and behaviour, thereby reducing the possibility of 'mistakes' in the future, or in current relationships. Equally, an unhelpful culture can create a 'vicious circle' or downward spiral.
The virtuous circle in management of 'soft' legal risks:
Most of us will be familiar with a situation at work in which we just don't seem to get on with a customer, or a supplier, or even another member or department within our own organisation. Things were going fine, but then something little happened that bothered us and we didn't say anything, so the other person kept on doing it, perhaps not knowing that it was bothering us. We start to lose interest in the relationship - we don't respond to telephone calls so promptly, the other person doesn't provide what is requested on time. Sooner or later the relationship has stagnated or, worse, deteriorated to such an extent that it is difficult to talk to each other. Your boss notices but you dare not explain to him (or her) what the problem is. Suddenly, you get a nasty letter from your supplier (say). It is picked on by management and they send a nasty letter back, threatening to end the relationship with the supplier. Both sides seek legal advice on how to terminate the contract. You can see where this is going. Sadly, this kind of slow deterioration or downward communication spiral in relationships can be found in a variety of situations (see box: case study of a dispute; see flowchart - the landscape of a dispute). There are, of course, ways to avoid this. The flowchart demonstrates that at practically any stage of a relationship it is appropriate at least to consider, if not to apply, some form of dispute management technique. The emphasis should, of course, be on prevention rather than cure - but even if the dispute has developed to such a stage that court proceedings have commenced or are even well advanced, good financial and management discipline suggests that mediation techniques should still be considered and could still be applied.
Techniques for raising awareness of legal risk and dispute management
The scope of the subject is too broad to cover all of these elements in depth in this article. Here, we will focus on some practical ways in which the effective management of disputes can create greater efficiencies in a company's continuing business relations with its customers, suppliers and joint venture partners.
The following are various 'hard' and 'soft' elements of dispute management. This list does not address issues of management of the litigation process, or of insurance as a risk management tool, for example. These have been addressed in detail in other articles [list of related PLC articles could be inserted here - see e.g. PLC August 2002 page 30]:
(1) General Awareness Raising
Presentations, workshops and 'road shows' to subsidiary offices in the home country and around the world, to as many employees as possible, in order to raise awareness and increase familiarity with aspects of legal risk and the methods the company or organisation uses to minimise and avoid it. This should include clear identification of a contact point (in the legal or compliance department) whom the employee can call, as a demonstration of commitment and back-up behind the communication programme.
(2) ' Legal Audits'
These help identify areas of strength and weakness, for example:
- a review of current litigation, arbitration or other conflict resolution techniques, to assess internal and extenal costs, likelihood of success, settlement options
- a review of standard contracts to assess whether the dispute resolution mechanisms are the most appropriate for the type of activity covered by the contract
- a review of existing contractual relationships with suppliers, distributors, customers and joint venture partners to assess whether there are any 'smouldering disputes' that can be avoided, or 'skeletons in the cupboard' to tackle.
(3) Training in 'alternative' dispute resolution skills
In addition to building an awareness of the strengths and weaknesses of different types of more formal dispute resolution techniques (such as seminars on arbitration options), introduce a series of workshops on, for example, mediation and how the mediation process works. This will enhance core communication and negotiation skills if well presented.
Warning signs - things to consider avoiding, during negotiations and whilst the contract is being performed:
- an unusual amount of time spent on negotiation of non-commercial terms
- lawyers spending increasing time discussing non-commercial or non-core terms
- business people not in control of the commercial elements of the negotiation
- key commercial terms are not clearly set out, or there is delay in clarifying them
- changes in the pattern of negotiation (e.g. from face to face, to more written exchanges, or vice versa)
- after signature, there is a personnel change which breaks continuity in the relationship between parties, or understanding of the commercial rationale for the contract and its intended implementation
- poor preparation and planning before negotiations start, inadequate follow-up either internally or with the counterpart, so that lack of clarity as to the process exacerbates lack of clarity as to the content, and as to the eventual commercial objectives
Warning signs - what to look for to avoid disputes developing
- increasingly late payments
- late response or non-response
- move from verbal to written communication
- tone of verbal / written communications - more fractious questioning or legalistic rhetoric
- internal time spent on analysis of legal position
- internal disagreements as to strategy / approach (are there hidden agendas?)
- loss of product or service quality
- change of personnel
- different messages reaching different layers of the organisation from the counterpart company
- in a joint venture: misalignment of interests which are dealt with as minor differences but which could conceal longer-term strategic differences, arguments over budgets, technical objectives, marketing campaigns
Checklist - Is the dispute suitable for ADR or mediation?*
In considering mediation as an option, ask the following questions:
Q: Do we have enough information to negotiate effectively?
If not, is this information more easily obtained by litigation/arbitration proceedings or by joint exploration in an assisted negotiation?
Q: Are negotiations constructive, or blocked, fractious or over-extended?
If they are blocked, what is the most critical leverage to improve negotiations? Could this be provided through neutral third party assistance?
Q: What are the likely forward costs of legal proceedings?
What are the direct and indirect costs on the Company? What are the chances of success, and when? If we went to mediation and failed, how much would it add to those risks and costs? How can those risks and costs be reduced?
Q: Would we benefit from an informal forum to explore core issues?
Would it help to explore the core issues, and the strengths and weaknesses of our case, before going further (with litigation, or with a series of negotiations)?
Q: What damage would be caused if we proposed mediation and they refused?
What would be the practical damage to us if we, or an ADR organisation, explored the idea of mediation with the other side?
* This checklist has been adapted from "International Mediation - The Art of Business Diplomacy" by Eileen Carroll and Karl Mackie (Kluwer Law International, 2000).
(4) Training in the 'softer', interpersonal skills used in alternative dispute resolution
These are the techniques which are applied by a mediator to help resolve a dispute. This is not so that everyone becomes a mediator, but so that everyone becomes better equipped, even on a personal level, to identify potential disputes at an earlier stage, to avoid disputes becoming contentious, or to deal more effectively with them once they have become contentious. Some might say that they already have many of these skills because they are experienced negotiators. There are, of course, other elements to these skills, and of course to the way they are deployed, that can be highly effective. In addition, these training sessions help to generate a common language, or set of reference points, and help to increase sensitivity to the subtler elements in contract and dispute management that might allow earlier identification of the best solution.
Not every dispute is capable of resolution using the facilitative, non-contentious techniques discussed in this article - that is why we have a court system, and why it is also well-used. This article does not set out to suggest that every dispute can be resolved, or even avoided. The accusation of 'idealism' in this area of practice is a familiar one. However, what is important to note is that it does not cost anything to remain aware of the possibilities, and to consider their suitability, in each individual case. Increasingly ADR practice is demonstrating that the 'default' solution of the court system is often capable of avoidance or of cost minimisation.
Conclusion
Much of what has been discussed in this article is a mix of the practical and tangible with the intangible (and therefore almost indefinable). The dispute management techniques described here will be familiar to virtually everyone, but their effective deployment does of course depend on the environment in which they are used. The 'virtuous circle' will reap its greatest rewards where the process of dispute review, management and control is institutionalised, in the sense that procedures exist, checklists are used, dispute resolution procedures in contracts are reviewed and adapted to the subject-matter of the contract. This is all part of that elusive thing, a company's culture. Culture has been described as simply 'the way we do things around here'. [provide quotes from other CEOs.]
What seems to be important, especially in the current climate of distrust of corporate organisations generally, is that there is 'buy-in' and support from the top of the organisation, supported by an effective implementation programme. Therefore, considering the current climate, it is our belief that it is more, not less, important to spend time and money on the 'softer' management skills described here. It is not time or money wasted - the benefits might not be immediately apparent but they can nevertheless be felt through more effective communication and improved efficiency in the conduct of business relations.
Esso restructures its dispute resolution system with its nationwide Agents
Through a period of great change, increased competition and tightened margins overall, Esso's relationship with its retailers had become increasingly strained. Seeking a forum in which each side's concerns could be understood and addressed, Esso approached CEDR Solve (CEDR's dispute resolution and prevention service) for preliminary discussions on a suitable process.
The key objectives were identified as:
- Improving the parties' communications capability.
- Creating a space for safe exploration of issues.
- Providing a forum to enhance both sides' ability to find a 'zone of agreement'.
It was thought that bringing in a detached third party would be the best method of dealing with the root of the problem. CEDR Solve had to work carefully in a highly sensitive area to ensure that both sides felt joint ownership of the process and equal confidence in it.
Gradually a series of workshops were designed and piloted which enabled retailers and Esso managers to re-open dialogue. The meetings created a safe environment in which both 'sides' were able to voice concerns and share each other's perspectives.
The groups engaged in co-operative problem-solving exercises and the outcomes covered a wide range of practical, financial and communication issues. By the end of the workshop, there was a common language and relationships had improved significantly.
One of the eventual outcomes was a CEDR Solve mediation scheme for Agents with a selected panel of mediators for any future disputes, devised and shaped by the workshop stakeholders/participants to prevent relationships from deteriorating to the same degree in the future. The scheme envisaged a fixed number of mediations annually, with Esso supporting its operation through a retainer with CEDR Solve. Each mediation incurs a flat fee split proportionally between the retailer and Esso.
A business relationship that went sour, and how it could have stayed fresh
Company A had entered into a short-term alliance with Company B to provide assistance to develop a certain product. Company B sub-contracted some of the work to a Contractor.
There was then a change of control at Company A, both in terms of shareholder and in terms of management. The new shareholder (Company C) was not enthusiastic about the agreement with Company B and was confident it could do the work itself at lower cost. It decided to terminate the agreement with Company B. This put B in difficulty with its Contractor, who nevertheless expected payment, and with whom B wanted to work in the future. C still needed to sub-contract some of the work for the project which A had initiated.
The change of personnel at both A and B meant that a route for informal dialogue no longer existed. Companies B and C started to engage lawyers to assess their position and to threaten proceedings. The parties attempted negotiations to settle the dispute but the focus of the discussion was always the contract that had been put in place between A and B, a contract which C no longer wanted. Each company focused on limiting its own exposure, and addressing its own concerns. The contract manager on each side focused on his own company's objectives, as well as his own personal objectives (on which, perhaps, a performance review might have depended).
Gradually, lines of communication were opened between different sets of counterparts and it emerged that both companies had other objectives, and different priorities, regarding the dispute and the general contractual environment. Company B managed to resolve its problems with the Contractor - so that it was no longer tied contractually to it - whilst Company C started to engage in dialogue directly with the Contractor regarding development of the product.
What can be learned from this? The key question should have been "Given that the commercial drivers have changed, what is it that each party now needs out of this?" (a forward-looking question) not "How can we get this contract to work again?" (a backward-looking question).
No forum or method of communication existed which allowed this. By moving very quickly to an examination of the litigation options, the options for dialogue and resolution became more limited, or at least more difficult to propose without such a proposal appearing to be a sign of weakness. Legal costs could have been reduced or even eliminated. Management time and money could have been saved. Early dialogue would have allowed work on the project to proceed at a quicker pace, thereby accelerating the time to market.
The facilitative techniques used in assisted negotiation (another way of describing the mediation process) would have allowed non-contentious communication at a much earlier stage of the process.
A joint venture has problems with its counterpart - or perhaps with itself
A joint venture (JV) had a long-standing business relationship with a counterpart (C) for the supply of a certain product. The market environment for the supply, use and resale of that product changed so that the contract was no longer as financially attractive to C as it once was. C tried to terminate the contract, citing non-performance of certain key obligations on the part of the JV.
Litigation very quickly ensued, and the parties became entrenched in the preparation of legal arguments relating to who had the right to terminate, the level of compensation, and so on. The parties were confident in their own abilities to negotiate a settlement but the contacts between them became less constructive, proceeding through carefully worded exchanges of letters. A mediation was set up, in which representatives from the shareholders of the JV and the counterpart were present, together with their lawyers. The mediation was the first time in several months that there had been direct contact between those representatives.
Unfortunately, the parties began the process with the wrong objectives: it was seen by both sides as an opportunity to test their legal arguments, and to fish for information on the strengths and weaknesses of the other side's case. Other individuals present felt personally exposed and saw it as an opportunity to vindicate their past conduct. Much of the mediation was conducted through lawyers, often adopting the style of an advocate. Consequently, after two days, the mediation ended without a resolution to what was in some respects a very complex dispute.
Only towards the end of the mediation did the parties begin to use the forum as an opportunity to explore commercial solutions - either a "clean break" with each other or a continued, restructured business relationship. It emerged that the JV shareholders were perhaps not entirely aligned in their objectives - a particular proposal might have been acceptable for some whilst not for others. These differences might not have been identified so quickly outside the mediation forum, and might have been a continuing obstacle to an overall solution to the dispute. Part of the "facilitative" process in the mediation environment was therefore useful for the shareholders in sorting out their own priorities and internal tensions. One of the shareholders had other business relations with the Counterpart, others did not. This was also proposed as a useful method of facilitating dialogue between the Counterpart and the JV as a whole. Whilst the dispute did not settle at the actual mediation, the process did provide a different environment in which to meet and evaluate the dispute. In turn, this allowed new ideas to be generated.
THE DISPUTE MANAGEMENT LANDSCAPE
| DESIGN STAGE & CONTRACT FORMATION
Questions: - what kind of contract is it? - how long will it last? - are there other contracts with this counterpart? - what is the best structure for dispute resolution? Action: - review overall 'contract universe' with the counterpart - types of contract and geographical spread - select dispute management structure - identify who will manage (1) the particular contract and (2) the overall relationship - give presentations to people from all parties on the scheme devised for management of the relationship (and disputes arising out of it) - consider use of a 'project neutral' (independent third party) - if a long project, consider establishing a separate forum of seniors from each party, e.g. a 'dispute review board' | CONTRACT IMPLEMENTATION
Questions: - have the pre-contract negotiations identified potential future difficulties? - are all parties performing their part of the deal as expected? - have external factors changed the nature of the deal? Action: - activate an informal 'high level review' between senior management of all parties - those not involved in day-to-day management of the project - to address the early warnings and to head off disputes - bring in the 'third party neutral' in a facilitative role - activate a formal meeting of the dispute review board
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DISPUTE ESCALATION Questions: - assess why earlier attempts to resolve the dispute failed - what is the real reason for the dispute? - what does each side want to achieve out of the dispute? - is litigation appropriate? If so, are parallel dispute management techniques feasible? Action: - maintain communication channels - consider any pre-litigation dispute resolution steps that have not been taken - if litigation has started, keep control of the dispute with the contract managers identified at the design stage (lawyers should help, but not take all the decisions)
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LITIGATION AND BEYOND Questions: - did all 'alternative' dispute management/resolution techniques fail? If so, why? - will the dispute go to appeal? If so, is there still scope for amicable settlement? Action: - re-visit the process of dispute resolution in the earlier phases in light of the litigation experience
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